L S Cables Ltd. v. Director of Income-tax
Offshore supply income and permanent establishment (PE) in India—explained in clean, student-friendly English.
Quick Summary
LS Cables, a South Korean supplier, sold transmission cables to PGCIL. Its Indian agent only helped with clearance, transport, and installation support. The Court held: no permanent establishment (PE) in India and no Indian tax on offshore supply income.
Issues
- Is offshore supply income of LS Cables taxable in India?
- Did LS Cables have a permanent establishment (PE) in India?
Rules
General Rule: A foreign company’s offshore supply income is not taxable in India unless it has a permanent establishment (PE) in India.
Agency PE Test: An agent creates a PE only if it habitually concludes contracts or plays the principal role leading to contract conclusion. Purely ancillary services do not create a PE.
Facts (Timeline)
Arguments
Appellant (Assessee)
- All supplies were offshore; title passed outside India.
- Agent did only ancillary support; no contract power → no PE.
- Therefore, no Indian tax on offshore supply profits.
Respondent (Revenue)
- Indian activities were linked to Indian projects → business connection.
- Presence of an agent in India suggested a de facto PE.
- Profits should be taxed in India as arising from Indian operations.
Judgment
The Supreme Court held that LS Cables had no PE in India. The Indian agent’s functions were ancillary and supportive—customs clearance, logistics, and on-site assistance—without any authority to conclude contracts. Hence, the offshore supply income was not taxable in India.
Ratio Decidendi
No authority → No Agency PE. Support-only activities by an Indian agent do not amount to a PE. Without a PE, offshore supply profits escape Indian taxation.
Why It Matters
- Guides foreign EPC/supply contracts serving Indian projects.
- Shows how ancillary agents differ from contract-concluding agents.
- Helps structure contracts to keep offshore supplies outside Indian tax.
Key Takeaways
- PE needs power: Habitual contract authority or principal role.
- Ancillary work ≠ PE: Clearance, logistics, and assistance are not enough.
- Offshore title pass supports non-taxability in India.
- Keep documentation clear on where contracts are concluded.
Mnemonic + 3-Step Hook
Mnemonic: “No Power, No PE.”
- Step 1: Ask: Does any Indian person conclude contracts?
- Step 2: If only support tasks, then no PE.
- Step 3: Offshore supplies → not taxable in India.
IRAC Outline
Issue: Taxability of offshore supply and existence of a PE in India.
Rule: No Indian tax on offshore supply unless a PE exists; agency PE requires contract authority or principal role.
Application: Agent had no contract power and did only ancillary tasks; title passed offshore.
Conclusion: No PE and no Indian tax on offshore supply income.
Glossary
- Permanent Establishment (PE)
- A fixed place of business or a dependent agent with power to conclude contracts on behalf of a foreign enterprise.
- Agency PE
- A PE formed through an agent who habitually concludes contracts or plays the principal role leading to contract conclusion.
- Ancillary Activities
- Support tasks like customs, storage, delivery, and on-site assistance that do not create a PE by themselves.
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